VAT – The Dilemma of SMEs

Recently there was a debate on increasing VAT as part of government’s drive to generating revenue and funding the budget deficit. The IMF has suggested that Nigerians pay one of the lowest tax rates of all developing countries and as such for government to generate more internal revenue it has to improve on VAT. This has led to diverse reactions and commentary from the public, politicians and experts.

I am of the opinion that there is a disconnect between policy maker and the reality on the field, especially for small business owners.

The issue of VAT and by extension other taxes is of great concern to a serious enterprise.

Let me give a brief on how VAT is calculated:

Let us assume that the cost of your raw material is N6000 it is expected that you would have paid 5% of it as input VAT which is N300

If after making your product, you sell it for N10,000 you are meant to charge an output VAT of 5% which is N500.

The amount to remit to government is N500 – N300 which is N200 and that is about 2% of sales turnover.

So where the raw material seller is not captured in the tax net, or where invoice received states VAT inclusive you are not permitted to deduct the input VAT which technically means you are paying for your vendors.

Many of the established businesses, especially the smaller ones that get their inputs from traditional market find it difficult to deduct input tax. So indirectly they have to cover for the inefficiency in the tax system by paying 5% flat on the sales turnover. This bites the profit and for a saturated industry it becomes more difficult to even squeeze any profit without hiking price.

In my opinion what we need as a nation to generate more revenue is not an increase in VAT but a better administration of VAT and other taxes. We need to broaden tax net by designing a smarter way of capturing enterprises and a more efficient way of collecting taxes.

FIRS tax administration has improved over the years but more still needs to be done in positioning Nigeria as a thriving economy.

As at 2018, N298.01 billion was realized in the fourth quarter, representing 8.96 per cent Increase Quarter-on-Quarter and 17.28% Year-on-Year according to figures released by FIRS.

Some of the questions for tax authorities are:

– How do we capture people that register as enterprise but conduct trade without TIN?

– How do we know exactly the sales turnover of these shadow business enterprises?

– Can BVN be linked to CAC registration process to ensure every business is trackable?

– Can we link registered mobile number to business registration?

– How can we make the filing of tax easier and more friendly?

Can the tax authorities allow businesses to deduct input VAT whether the vendor is captured or not, as long as there is a valid receipt? The tax authority can use the receipt to backtrack to the vendor and charge him/her appropriately for the VAT he/she has or should have collected.

The administration should therefore continue to deploy creative ways to improving VAT collection rate. For a population of about 190million people, our focus should be on a broader tax net. Increasing VAT rate to raise revenue in the context of Nigerian economy is a suboptimal and inefficient approach to fixing budget deficit.